Chapter 2.

The Labor Market: Definitions, Facts, and Trends.

Labor Force Measures

• (Adult) Civilian noninstitutional population.– persons 16 years of age and older – residing in the 50 States & DC– not inmates of institutions (e.g., penal and

mental facilities, homes for the aged), – not on active duty in the Armed Forces.

Labor Force Measures

• Employed persons. – during the reference week,

• did any work at all (at least 1 hour) as paid employees,

• worked in their own business, profession, or on their own farm,

• or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family,

• all those who were not working but who had jobs or businesses from which they were temporarily absent

Labor Force Measures

• Unemployed persons. – no employment during the reference week, – available for work, except for temporary

illness, and made specific efforts to find employment some time during the 4-week-period ending with the reference week.

– Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

Labor Force Measures

• Labor force. employed + unemployed

• Unemployment rate. Unemployed / Labor Force

• Labor Force Participation rate. Labor Force / Civ. NonInst. Pop

• Employment-population ratio. Employed/ Civ. Noninst. Pop.

• Historical Data (Table B35 from Econ. Report)

1995/2005 DataAdult Civilian Noninst.

Population(203.133 / 224.640 m.)

Labor Force(136.297 / 148.203 m.)

Not in labor force(66.836 / 76.437)

Employed(129.558 / 140.156 m.)

Unemployed(6.739 / 8.047 m)

Labor force measures

1994 2005

Unemployment rate

Labor force participation rate

Employment rate

• Start with U=10 million, E=90 million, CNIP=200 million

• What would happen to unempl rate, lfpr, and empl rate if– 10 million people out of labor force begin

looking for work and 6 million find jobs.– 1 million unemployed people become

“discourage” and quit looking for work?– 1 million unemployed people find new jobs?– 1 million employed people lose jobs and .5

million choose to retire while the other .5 million begin search for new jobs.

Unemployment rates

• See employment situation for variations in unemployment rate by– Sex– Age– Education

• Why is there a correlation between these characteristics and unemployment rates?

• Wage rate X hours worked =Earnings

• Earnings + Benefits = Total Compensation

• Total compensation + unearned (non-labor) income = Total Income

Labor Earnings

Earnings Measures

Real versus Nominal Wages.

• CPIt =

• Real Waget =

• Nominal Wage represents earnings in current dollars.

• Real Wage represents earnings in constant (base year) dollars.

baseyearinbundleofCost

tinbundleofCost*100

)100/(

.

t

t

CPI

WageNom

Real versus Nominal Wages.

• Issues with Indexing– The bundle

• Varies across people/time.• Evidence that CPI over-states growth in cost of living by 1 to

1.5 percent per year).– Quality of goods

– Substitution effects

• Point in time adjustments versus across time– Comparable salary in city j = salary in city k * city j cpi

city k cpi

Real versus Nominal Wages.

• CPI data (available from BLS)• If a person earned $8 per hour in 1980, what

would yield the equivalent purchasing power in 2006?

• If a person’s nominal wage rose from $10 per hour in 2000 to $11 per hour by 2006, what happened to their real wage (in 1982-84 dollars)?

Earnings Measures

• Cost of Living by City (ACCRA)

• If a person moved from Cincinnati to Washington DC and their earnings rose from $50,000 to $60,000, did their real earnings rise or fall?

• What are some of the problems with the Cinci/DC comparison?

Labor Demand

• Changes in wages (move along D-curve)– scale effect– substitution effect

• Changes in other factors (shift D-curve)– demand for product

• scale effect, no substitution effect

– supply of other inputs (e.g. capital)• scale effect and substitution effect

Labor Demand

• Market, Industry, and Firm Demand.– different ways of measuring labor demand.

• Long run versus short run demand.– substitution effects tend to be larger in the

long run, making labor demand more elastic in the long run.

Labor Supply

• Labor supply curve.– Market supply curve: upward sloping.– Firm supply curve: horizontal in competitive market.

• Factors shifting labor supply:– population.– alternative opportunities (other employment,

nonemployment)– taxes– non-pecuniary aspects of job (fringes, risk, night

shifts, etc.)

Labor Market Equilibrium

• If wage is below equilibrium: shortage.• If wage is above equilibrium: surplus (unemployment).• Shortages put upward pressure on wages. Surpluses put downward pressure on wages.

Labor Market Equilibrium

• Effect of – Increased population– Increased tax on employers– Increased tax on employees– Cheaper capital– Cheaper imports– Increased demand for product